Virginia Running Budget Surplus, But Tax Hike Passes Anyway

On June 11, Virginia Secretary of Finance John M. Bennett wrote a blockbuster memo to Governor Mark Warner (D), noting tax revenues were running much higher than anticipated in the state.

"May is a significant revenue collections month, with estimated and final payments for individual income taxes due May 1," wrote Bennett in the memo. "Total general fund revenue collections for the month increased 7.3 percent above May of 2003. Strong collections in sales and use taxes, a few large estate tax payments, fewer income tax refunds, and some increase in withholding collections accounted for most of the growth."

Bennett continued, "Year-to-date revenue growth of 9.3 percent is well ahead of the annual forecast of 6.7 percent."

Bennett's memo has caused many state observers to doubt the wisdom of the recent vote in Virginia to impose a record increase in state taxes.

Numbers Unavailable for Debate over Increase

On April 28, after more than 100 days of heavy fighting, the legislature approved the biggest tax increase in Virginia's history--a biannual price tag of $1.6 billion. Some thought the year's political drama was over, and tempers would cool off.

But rancor runs deep in the Commonwealth these days, and the release of the updated revenue figures, which clearly show Virginia to be on the path toward economic recovery, made some analysts question whether the governor had held back the numbers in order to get his tax increase passed.

Said Senator Ken Cuccinelli (R-Fairfax), a staunch opponent of the tax increase, "We will have a fiscal year (FY) 2004 surplus in excess of $500 million. We knew about half of the surplus during the session, but when the very positive March figures came out, we were given very specific reasons why the March numbers were unreasonably positive, and that the 'overly positive' numbers would be corrected in April and May, again with very specific reasons provided. None of this turned out to be true. None of it."

In March and April, general fund revenues were 22.5 percent ahead of the same two months of the previous year. Although the May increase was more modest--up 7.3 percent--it was still good enough to boost year-to-date tax collections by 9.3 percent with only one month left in the fiscal year.

Cuccinelli questioned whether the outcome of the tax increase vote would have been the same had the numbers been available earlier. "While I cannot speak for the pro-tax Republicans (in the Senate)," he said, "it is safe to say that had the tax vote been delayed long enough to have just one more month's worth of data, the pro-taxers' picture of the Virginia economy would have been blown out of the water, and it would have been much harder to get to 51 votes in the House of Delegates."

Doubts About Need for Tax Hike

"Governor Warner and his entourage of tax hikers are unimpressed by the revenue data and continue to hold the tax increase was necessary and an important step forward," said Grover Norquist, president of Americans for Tax Reform. "For the governor, the tax vote was the happy end of the drama. Since then, Warner has embarked on his victory tour and is holding himself up as a fiscal model."

Warner campaigned on a "no new taxes" platform but recently changed his mind.

"The fact is I will not raise taxes. My plan states it. I've said it through this campaign," remarked the governor during his gubernatorial campaign in 2001.

But after April's record tax increase, the governor said at a meeting of the Democratic Leadership Council, "I believe what we have done in Virginia contains some pretty important lessons for Democrats throughout the United States and our colleagues in Congress. Because I believe today we're in a time that cries out for leadership ... on fiscal issues."

Battle May Resume

For fiscal conservatives, the battle is not over yet. According to John Taylor, president of the Virginia Institute for Public Policy, "we are two acts through a three-act-play."

According to Taylor, the first act was the November 2002 sales tax referendum, where Virginia voters rejected higher taxes by a large margin. The second act was the 2004 legislative session, with the tax hike being the closing scene.

"The third and final act will be the House races in November 2005," he predicted.

Some analysts see the tax hike as having very negative implications for the state's Republican Party. Arthur Purves, president of the Fairfax County Taxpayers Alliance, said, "the Republican Party itself has surrendered to the forces of big government."

Others, however, are more optimistic.

"The silver lining is that the tax issue has galvanized the GOP," said James Parmalee, chairman of NorthernVirginiaGOP.com. "Our presumptive nominee for governor, Jerry Kilgore, will be running a strong anti-tax platform and the Democrats are already backpedaling on the tax issue. So once again, we'll take it to the voters, and that is what the tax and spend liberals are afraid of."

Norquist agrees. "The future of the Republican Party belongs to those who vote for lower taxes," he said. "Republican tax hikers are a dying breed."

Said Cuccinelli, "This tax hike is not a reflection of Virginia voters. If that is proven at the ballot box in 2005, Virginia will very quickly become a model ... for the consequences of increasing taxes, especially in a steeply rising economy."

Sandra Fabry is a state government affairs associate for Americans for Tax Reform. Her email address issfabry@atr.org.